Challenges seen ahead as Tanzania shilling adjusts to real value

Prospects for long-term gains as the overvalued shilling is moving to its equilibrium value can be realised if the economy will adjust to the situation, according to an economist.

Dr Jehovaness Aikael of the University of Dar es Salaam told the Business Standard that the long-term gains from weakening shilling would be subject to increased exports to take advantage of its increased competitive edge as a result of being cheaper.

The scholar said the weakening of the shilling will lead to short-term hardships as imports will be more expensive while relief from exports, which will become cheaper and hence more competitive, is not expected immediately.

“If the economy will not adjust to the situation the sufferings will take long, but when it adjusts there will be long-term improvements,” Dr Aikaeli said.

The scholar said Tanzanians should brace for short-term suffering when the overvalued shilling is weakening towards its equilibrium value because exports would not grow in an overnight to take advantage of the situation.

“In the short time when the economy adjusts, there will be sufferings but there will be long-term gains to the economy provided the economy adapts to the situation,” he said. He said when the shilling moves towards its equilibrium value, exports will be more competitive.

However, for country considered as a net importer like Tanzania, the short-term sufferings would be prolonged unless the economy is strengthened and take advantage of the situation.

He said an overvalued exchange rate implies that a countries currency is too high for the state of the economy. Overvalued currency will make exports uncompetitive in the international market which will hurt the export industries.

He said it was a positive development to the economy as it would make exports more competitive The International Monetary Fund said last week that the Tanzanian shilling has weakened to closer to its “equilibrium” after trading at too strong a level last year.

The shilling has been weighed down by a strong U.S. dollar, high liquidity, seasonally low export income and high repatriation of corporate dividends, the IMF said in an e-mailed statement on Wednesday.

The currency has lost a fifth of its value against the dollar since January, adding to last year’s 8 percent drop. “The shilling, which was assessed to be somewhat overvalued in 2014, is now closer to equilibrium,” the Washington-based lender said.

Economic growth for the rest of 2015 and next year will remain close to 7 percent after first-quarter expansion of 6.5 percent, the IMF said.